Weighing Dividend SuspensionsMar 25, 2020

 

Fears over the coronavirus outbreak left a heavy toll on stock prices over the past weeks. Unsurprisingly, this persistent crisis is now starting to have a toll on companies’ dividend policies.

Colin Morton

Colin Morton
Vice President, Portfolio Manager, Research Analyst
Franklin UK Equity Team, Franklin Local Asset Management

 

In recent days, several UK listed companies have announced suspensions, omissions or cuts in dividend payments. As virus containment measures are stepped-up in the UK and other countries, many businesses face prospects of a significant drop in revenues - or no revenues at all - for the foreseeable future, while facing recurring fixed costs (e.g. rents, wages, leases etc.). This places notable drags on working capital and liquidity positions, to an extent not witnessed even during the global financial crisis.

Some of the first movers to cut dividends are companies in consumer-facing sectors such as retail, media, travel & leisure. As measures to contain the pandemic intensify, this trend is likely to grow in our view, impacting other parts of the economy. For instance, companies in the construction and housebuilding sectors could be forced to take similar measures as building sites across the UK are halted.

While investors grapple with the numerous dividend policy announcements, we are careful not to tar all the companies in the same brush.

As active stock pickers, we are spending time analysing businesses and identifying underlying rationales behind these announced dividend changes or potential changes to come. Understandably, we are finding dividend cuts among companies with more levered balance sheets and/or in companies seeing significant impairments to their cash flow, impacting debt repayment capabilities. Yet in other instances, we find that even what we view as good quality companies, with dominant market positions and resilient fundamentals, are choosing to pass on dividends. These businesses seem to be taking pre-emptive actions to preserve cash and keep balance sheets healthy. This can be a prudent approach in our view, and possibly the right thing to do given the exceptional market circumstances today.

Within our portfolios, tracking pay-out policies and dividend changes over time provide very useful insights into the financial health of a company, as well as the merits of its management team. As we assess the risk/reward profiles of our holdings, we are reluctant to be selling those businesses which we believe remain fundamentally sound, and which are demonstrating prudence and pragmatism by omitting a dividend payment or temporarily suspending a share buy-back programme, to better whether the storm.

Eventually, it’s the companies with suitable balance sheets and agile capital allocation policies, who will be able to prevail and withstand the activity slowdown in our view.

It’s hard to predict how long this crisis will continue to weigh on company earnings and dividends, whether months, quarters or more. Yet, we note very encouraging signs from China this month, where restrictive measures are gradually being lifted, allowing the progressive return to more normalised activity levels. Signs of peaking new infections in Italy (among the most hit Western country) are also very positive. Historic precedence would suggest that it may take clear evidence of the pandemic peaking before equity markets have the confidence to look beyond the immediate impact.

As a Franklin UK Equity team, we remain committed to our disciplined and time-tested investment approach. We remain focused on fundamentals, valuations, and stand ready to take advantage of long-term opportunities that arise in the UK market.

Important Legal Information

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Opinions expressed are the authors at the publication date and they are subject to change without prior notice. Given the rapidly changing market environment, Franklin Templeton disclaim responsibility for updating this material.

This article is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any of Franklin Templeton’s fund ranges. Nothing in this document should be construed as investment advice. Franklin Templeton has exercised professional care and diligence in the collection of information in this document. However, data from third party sources may have been used in its preparation and Franklin Templeton has not independently verified, validated or audited such data. Investments entail risks. Any research and analysis contained in this document has been procured by Franklin Templeton for its own purposes and is provided to you only incidentally. Franklin Templeton shall not be liable to any user of this document or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission. For more information about any Franklin Templeton fund, UK investors should contact: Franklin Templeton, Telephone: 0800 305 306, Email: enquiries@franklintempleton.co.uk or write to us at the address below. Alternatively, the information can be downloaded from our website www.franklintempleton.co.uk. Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.

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